Stabilization in Argentina : A Never-Ending Story

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For many years Argentina has combatted high inflation. several attempts to curb this have resulted in failure. The most recent attempts -- under Frondizi in 1959, Krieger Vasena in 1967, Martinez de Hoz in 1976, and the Austral Plan under Carlos Menem in 1985 -- have all experienced measured amounts of success, and until the Austral Plan, all have failed. Frondizi used strictly orthodox methods -- fiscal and monetary controls -- combined with a devaluation of their currency and backing by the International Monetary Fund to combat their fiscal deficit and attempt to create a favorable balance of payments. However, limitations in the external sector prohibited the necessary changes from taking place and the country returned to hyperinflation. In 1967 Krieger Vasena took office. He used some heterodox policies, but his plan for stabilization was mainly orthodox in scope. Krieger believed that the inflationary force in Argentina was cost-push rather than demand generated as others believed. He then set to work with a plan which would counteract those forces. His plan included wage and price controls, and a liberal monetary policy was followed. He experienced limited success, but soon political pressures from the agricultural exporters and general hostility towards his policies forced him to abandon the wage and price controls and the economy soon returned to even higher levels of inflation than before. Martinez de Hoz returned to the traditional belief of demand-generated inflation and shaped his policies accordingly. His program followed strictly orthodox lines with extreme pressure placed on the public sector. Where he succeeded in building up foreign reserves, he failed in controlling inflation. By the third phase of his program it was evident that the policies which had been enacted were not producing the desired effect on inflation and de Hoz changed his opinion on the inflationary force to one which has cost control as its primary need. He changed the focus of his policies to cost control but with little positive effect on the economy. By 1981 approximately 70 businesses had folded under the pressures placed on them by the government and 15 percent of the labor force was out of work. That plan also failed. The Austral Plan is the most innovative plan which has been attempted in Argentina. It combines heterodox policies to help control wages and prices while the more orthodox fiscal and monetary policies can be enacted. President Carlos Menem has thus far presented an energetic image to his people, and the short-term policies were largely successful in bringing down inflation to a more manageable rate. However, inflation has become quite volatile and it is evident that more thought must be given to long-term fiscal policies which would further stabilize the economy. Menem' s decision to open up Argentine businesses to foreign ownership is quite possibly the most controversial of all, yet this privatization program has proved monumentally successful, and continues as foreign companies bid for rights to Argentina's wealth of resources. The outlook as of February 1993 is positive. President Menem and his experts have managed to reduce the inflation rate substantially, and it stood at 17.5 percent for 1992. The exchange rate has also stabilized at 1 to 1 compared to U.S. dollars. This can be attributed to the build up in reserves to back the Argentine currency. The amount of reserves now equals $12 billion in dollars, and the spending of dollars in Argentina is encouraged. Although it may not yet be time to celebrate to victory, the Argentines may at last take a deep breath and smile at the prospects of the future.